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GungHo Drop Shows Risk of One-Hit Wonders for Fortnite Fans

(Bloomberg) -- GungHo Online Entertainment Inc. is starting to look like another one-hit wonder in the game industry.

Shares in the Tokyo-based game maker dropped 11 percent on Monday, the most in two and a half years, as hopes for a follow-up to the company’s Puzzle & Dragons mobile game franchise fade. As it reported earnings Friday afternoon, GungHo said monthly active users for the game continued to slump in the quarter ended June 30 and operating profit fell 38 percent, rounding four straight years of declines.

The struggles of GungHo, whose 2012 Puzzle & Dragons was once the world’s highest-earning mobile game, is a reminder of how difficult it is to create a new hit, even for today’s stars like Fortnite developer Epic Games. The Japanese company teamed up with developer Level-5 Inc. to create Yokai Watch World, the newest installment in the ghost-fighting game franchise. Downloads of the game, which uses Google Maps to create 3-D game environments based on real-world locations, exceeded one million in the two weeks after its release in Japan on June 27. But after topping the rankings for one day, the game’s popularity slid dashing hopes for a Pokemon Go-like hit.

“Japanese mobile game makers have been too reliant on the role-playing titles, so they can’t keep pace when a new genre like [Fortnite’s] Battle Royale becomes popular,” Hideki Yasuda, an analyst at Ace Research Institute, wrote in a report.

The Japanese publisher saw its annual sales slump last year to almost half of the 173.1 billion yen ($1.6 billion) peak in 2014, as the puzzle-cum-strategy game failed to catch on abroad and popularity at home waned. It released a location-based version called Puzzle & Dragons Radar in March 2016, but that was overshadowed by Pokemon Go’s frenzy four months later.

GungHo has pioneered many of the techniques that get users to keep coming back and paying and the strategies have since been adopted by rivals throughout the world. Japan’s top three grossing free-to-play games are Sony Corp.’s “Fate/Grand Order,” Mixi Inc.’s “Monster Strike” and Colopl Inc.’s “White Cat Project,” according to market researcher App Annie. Yokai Watch World was 11th in Japan iOS download rankings for games on July 29 and didn’t make the top 100 ranking by sales.

“Yokai Watch World has not become a hit title yet,” Yasuda said. “We continue to view it conservatively.”